Lord Mandelson, the Business Secretary, has acknowledged for the first time
that Britain's freedom of action outside the eurozone has allowed the
country to limit the damage from the downturn.

The former EU trade commissioner and long-time advocate of the euro told The Daily Telegraph that the 25pc devaluation of the pound over the last two years had served as a shock-absorber for the economy. "Sterling flexibility has provided an additional support to demand," he said.

Lord Mandelson praised the Bank of England for piloting the financial system through the storm using quantitative easing (QE).

Such a policy is not possible for countries such as Ireland, Spain and Greece, which face debt-deflation strains within the eurozone.

The European Central Bank has so far held back from QE, except for a modest €60bn (£53bn) purchase of covered bonds. The result is an over-valued euro and a contraction of eurozone credit, making it much harder for Club Med countries to adjust to their property slumps.

Lord Mandelson, who has reportedly called on Labour to "come clean" on the need for public spending cuts, defended the policy of running a record peace-time deficit. "Governments of the past have made the mistake of letting recessions blight the prospects of a whole generation. They've cut investment in people and their skills, let people slide into long-term unemployment," he said.

Denouncing the siren calls of protectionism, he said that efforts to rebalance the global system are not going to work unless surplus states boost import demand to offset belt-tightening by the West.